September 11, 2009

9/11, Osama, and the Bubble

While I’ve been editing Takimag, I’ve yet to commission any articles or symposia on 9/11 for the simple reason that I don’t think there’s much of anything new to be said. Certainly, most pieces I read on the matter descend into the same clich?s and vague evocations. There is one thing, however, that’s almost completely unappreciated by the mainstream media and which is only now coming into view after our economic bubbles have bursts—the degree to which the 9/11 attacks inspired Alan Greenspan’s “easy money” orgy in the first half of the decade and the resulting inflations in the housing and stock markets. Ron Paul explains the connection well in his new book, which you should all go out and buy:   

The core of the contemporary problem dates from 2001 when the Fed attempted to forestall recession through low interest rates. Actual interest rates fell well below historical averages and any monetary rule that the Fed claimed to be following [e.g. the “Taylor Rule”]. Greenspan slashed the federal funds target from 6.5 percent down to 1 percent by June 2003. He held the rate at this level for a full year before ratcheting them up again to 5.25 percent in June 2006, a move that popped the bubble he had earlier created.

[W]hen the Fed lowers interest rates below their natural level on a market, it has the effect of expanding investment beyond a sustainable level. Businesses begin investing as if consumers had the savings to back up the signals that the interest rates are sending. But real resources are creating no new capital; they are merely distorting the signals borrowers use to assess risk. 

We should also consider the political context of the tie. The terrorist attacks on American soil had taken place, and the entire country was moving toward war frenzy. The idea then was that we would not let terrorists beat us economically or politically—fine impulses but also conditions that led to stupid decision making. Part of the drive of the Fed to inflate in the year following the attacks was to create an appearance that we as a nation had not been harmed in any way—that our economy was stronger than ever.

Sadly, Greenspan chose the wrong means to convey this message. It would have been an ideal time to put the economy on a firm foundation, even to the point of risking recession, rather then providing artificial stimulus that would later prove to be illusory. Everyone in those days was consumed by the drive to not let the terrorists win. Well, the Fed assisted in undermining the foundation of the structure of the American economy and, in the long run, did more damage to American economic prosperity than the attacks of 9/11. Greenspan aimed the gun at the terrorists and shot the economy in the foot instead.


Perhaps “shot the economy in the face” would be a more accurate metaphor.

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